Wednesday, July 5, 2017

Malawi cuts rate 400 bps as disinflation takes hold

Malawi's central bank slashed its policy rate by 400 basis points to 18.0 percent as the disinflationary momentum has strengthened, with the stabilization of the kwacha's exchange rate boding well for a continued decline in inflation.
The Reserve Bank of Malawi has now cut its policy rate by 600 basis points this year following a cut in March and by 900 basis points since embarking on an easing cycle in November 2016.
Malawi's inflation rate slowed for the 10th consecutive month in May to 12.3 percent from 14.6 percent in April, with food inflation dropping to 11.2 percent in May from 29.2 percent in July 2016 due to the improved supply of food.
"The outlook for inflation has improved significantly since the last MPC meeting, especially because the May data confirm that disinflationary momentum has strengthened," the Reserve Bank said.
In its monetary policy statement from last month, titled "Maintaining the declining path of inflation," the Reserve Bank forecast that inflation would continue to decline and reach 10.7 percent in June and 8.5 percent in December.
The kwacha has been relatively stable this year in contrast to the previous five years when it steadily depreciated. Today the kwacha was trading at 726 to the U.S. dollar, down 1.4 percent this year. Compared with the start of 2012, the kwacha is down 78 percent.
"Supported by low Kwacha liquidity and relatively subdued demand for foreign exchange, the exchange rate has been relatively stable during the past twelve months," the central bank said.
Helped by more favorable weather, the central bank forecast that Malawi's economy should grow 4.5 percent this year, up from 2.7 percent last year. However, the central bank also noted that continued economic recovery depends on macroeconomic stability and improving supply.

The Reserve Bank of Malawi issued the following statement:

"The Monetary Policy Committee (MPC) met from 4 to 5 July 2017 to
review recent economic developments and decide on the monetary
policy stance in order to consolidate the gains made in stabilising the
economy.
After taking into account the disinflation process in the recent past and
inflation outlook going forward, the MPC decided to reduce the Policy
Rate (PR) by 4 percentage points to 18 percent, and maintain Liquidity
Reserve Requirement (LRR) at 7.5 percent. Before arriving at this
decision, the Committee considered latest developments in the global
and domestic economies.
Global economic growth is expected to strengthen marginally to 3.5
percent in 2017, from 3.1 percent in 2016. The pickup in global activity
is driven by developments in emerging and developing economies.
On the domestic front, real GDP growth is projected to rebound to 4.5
percent in 2017 from 2.7 percent in 2016, on the backing of favourable weather conditions and stable macroeconomic environment. The MPC
however, recognises that continued economic recovery over the
medium to long-term horizon depends on sustained macroeconomic
stability and addressing underlying structural constraints, especially on
the supply side.The MPC observed that inflation has continued to decline for the tenth
consecutive month. Headline inflation fell to 12.3 percent in May 2017,
from 23.5 percent in July 2016. Food inflation dropped to 11.2 percent
in May 2017, from 29.2 percent in July 2016, on account of improved
supply of food stocks. Non-food inflation decelerated to 13.5 percent in
May 2017, from 18.7 percent in July 2016, reflecting lagged effects of
tight monetary policy. The outlook for inflation has improved
significantly since the last MPC meeting, especially because the May
data confirm that disinflationary momentum has strengthened.

Growth in money supply rose to 18 percent year-on-year in May 2017,
from 15 percent in December 2016, but was below 26.3 percent
recorded in May 2016. The underlying pace of monetary expansion
was in line with seasonal patterns and was consistent with the level of
economic activity for the year.

Net credit to government from the banking sector expanded to K104.8
billion in May 2017, from K86.0 billion recorded in January 2017.

Private sector credit from the commercial banks increased marginally to
K404.8 billion in May 2017, from K398.5 billion in January 2017.
Conditions in the money market remained tight, as evidenced by the
interbank rate being kept close to the Policy Rate. The Bank continued
to withdraw liquidity injected from government operations. All-type
Treasury bill average yield settled at 22.2 percent as at end-May 2017,
following convergence of yields across tenure.

The central bank’s official reserves increased to US$678.70 million
(3.25 months of imports) in June 2017, from US$610.25 million (2.92
months of imports) recorded in May 2017 and compared with
US$648.20 million (3.10 months of imports) in June 2016. Supported
by low kwacha liquidity and relatively subdued demand for foreign
exchange, the exchange rate has been relatively stable during the past
twelve months. The MPC noted that the stabilization of the Kwacha
augers well for the disinflation process."www.CentralBankNews.info